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Why traders aren't piling in to short Spotify

Investors are largely holding back on bets that streaming service provider Spotify’s (SPOT) stock is going to crumble. At least for now.

Since its April 3 debut, Spotify’s stock has fallen from its $165.90 opening price to trade around $150 – hardly a strong start, but not apocalyptically bad. However, the company has yet to take on a big threat from a notorious drag on growth – short sellers.

Short sellers “rent” stock with the expectation that the price will fall at which point they buy the stock and sell the more expensive shares they previously held, pocketing the difference. These investors are essentially looking for overvalued companies, rather than undervalued ones, to invest in and make money.

Spotify has attracted just over 603,000 shares of short interest borrowing at just $93 million, according to data firm S3 Partners. To put that number in perspective, two weeks after Snapchat parent company SNAP made its market debut in 2017, S3 found traders were shorting 22 million shares worth $454 million. Tesla (TSLA), currently the most shorted company in the world, has drawn $10.7 billion worth of short interest.

“Stock loan rates have eased significantly as there is not a stampede to short Spotify at the moment,” Ihor Dusaniwsky, managing director of predictive analytics at S3, told Yahoo Finance via email. “Unlike other recent tech IPOs, demand on the short side is light compared to recent trading volumes.”

The low level of shorting may have more to do with a lack of shares than investor confidence, some investors say. Because Spotify came to market as a direct listing rather than an initial public offering, investment banks and large brokerages may not have shares available to “rent” to investors so they can short them, noted Giri Cherukuri, head trader at OakBrook Investments.

The Spotify logo hangs on the facade of the New York Stock Exchange with U.S. and a Swiss flag as the company lists it’s stock with a direct listing in New York, U.S., April 3, 2018. REUTERS/Lucas Jackson”It makes sense that there’s a technical limitation in the short term,” Cherukuri said in a phone call. “As the investor base spreads and more institutions own [Spotify stock] the ability to short will expand.”

Additionally, because the shares all had to come from original equity holders in the company, they may not have incentive to allow short sellers access.

Firms charge a fee for “renting” out the shares to investors who want to short a stock. That fee can sometimes be very high and prohibitive because it eats into short sellers’ profits if the stock falls and adds to losses if the stock rises. However, Dusaniwsky noted that the cost to short Spotify has been comparatively low, meaning it’s unlikely that has been the reason for the lack of short interest.

It may be that investors simply do not know enough about the company to either buy it or short it. The unusual listing for Spotify, which didn’t include a banking underwriter or visits to tout the stock to investors and open up the books, known on Wall Street as a roadshow, has been a reason to steer clear, traders said.

“Investors probably would like to see that trade a little more and get some idea – because of the way it came to market – of what’s the real value for the company,” said Dave Chojnacki, market technician at Street One Financial. “That’s probably really what people are looking at before they step in there and decide to go either way, because it’s not a traditional IPO.

Chojnacki said he’d want to see at least two quarters of earnings from Spotify before taking a position.